Abstract

According to received literature, vertical integration may enjoy a social superiority due to the ability to internalize the externality that goes back from the pricing policy of the downstream firm to the profits of the upstream firm. We challenge this result introducing process R&D in a broad set of scenarios with vertically symmetric and asymmetric R&D commitments. In some of these contexts a reversed sequence of socially desirable vertical arrangements arises, making out-sourcing superior. In other circumstances disintegration is privately superior but socially in efficient. Finally, vertically asymmetric costs of R&D are considered to allow for a wider range of applications.